Disaster Recovery

After the Fire

The Fort McMurray community is now focused on recovery, but it will be a long-term effort.
By: | October 1, 2016 • 7 min read

The raging wildfire that roared through Fort McMurray in Alberta, Canada, in May and June was so fierce it burned the entire country’s economy.

Advertisement




As a result of the fire, Canada’s GDP experienced its worst dip since the depths of the Great Recession. Losses from the blaze resulted in a 1.1 percent economic contraction in the second quarter.  The Bank of Canada cut the country’s economic outlook for the year due to the catastrophe that stopped production at oil sands facilities, forced the evacuation of about 94,000 people and destroyed 2,400 buildings.

The most recent estimate by Property Claim Services puts the insured losses at about $3.6 billion — but while more than 5,000 commercial insurance claims (about $1 billion) are included in that estimate, the hard-hit oil sands producers report few insured losses.

VIDEO: The wildfire had a devastating impact on businesses in the area.

At the peak of the fire, 10 oil and gas producers were temporarily shut down, while work at another one was reduced, said Paul Cutbush, senior vice president, catastrophe management, Aon Benfield Canada.

Even though 1.2 million barrels a day, or about $65 million daily, was lost during that month-long shutdown while the fire was nearby, “no one is talking about any oil and gas claims,” Cutbush said.

That position was made official by Suncor, one of the largest operators that was shut down due to the evacuation, and saw its production reduced by about 20 million barrels because of it.

“The company incurred $50 million of after-tax incremental costs related to evacuation and restart activities,” according to the company’s Q2 earnings report, “which was more than offset by operating cost reductions of $180 million after-tax while operations were shut in.”

It’s not just the lack of damage, said Cutbush. BI policies typically have a waiting period before policies are triggered. That period typically is 60 to 90 days, but since the marketplace is very competitive, he said, it’s possible that some of the oil and gas producers had a 30-day waiting period.

Even so, the evacuation orders issued May 3 that shut production around Fort McMurray — the hub of Canada’s oil sands extraction and processing facilities — only lasted three to four weeks, depending on their location, he said.

“A lot of companies went back online 30 days after the fire,” Cutbush said. “I think if you see any claims, it will be those [insurance] writers who have more competitively agreed to do 30-day waiting periods. But it’s still too early to tell.

“It’s risk management but it’s net retained non-insured risk management.”

The energy companies’ facilities were protected by the effectiveness of the “fire breaks” built to divert the wildfires, he said.

Emphasis on Safety

“The core of Fort McMurray exists because of the oil sands,” said Bill Adams, vice president, Western and Pacific for the Insurance Bureau of Canada (IBC). “There is a strong focus on safety in those operations, and most of the people in and around Fort McMurray have that in their blood.

Bill Adams, vice president, western and Pacific, Insurance Bureau of Canada

Bill Adams, vice president, Western and Pacific, Insurance Bureau of Canada

“I am not sure any other community in North America could have accomplished the same as that town did.”

From a risk mitigation perspective, Adams said, “this incident really set a new benchmark for what can go wrong when you build a municipality in a boreal forest. We have never seen an event like this that affected so much infrastructure.

“Assessing this fire will definitely give us a new understanding, and many municipalities will have opportunities to avail themselves of the learnings.”

Andrew Bent, manager of enterprise risk management for the Alberta Energy Regulator, also praised the energy companies.

“The operators were fantastic. They knew they were part of the community and they were fast to take in some of the more than 88,000 people who had to be evacuated,” he said.

“As regulator for the industry, we require all operators to have emergency response plans in place.

Advertisement




“Those plans vary with the nature of the operator from site-specific to more general contingency planning. Even so, we were dealing with an event of unprecedented scale. The fire moved very quickly and behaved very unusually from a risk-management perspective.”

The Alberta Energy Regulator had its own risk to manage as well: Bent said the staff’s families had to be evacuated.

“Once we had that secure, we swung into our role of industry support. We were in day-to-day contact with the operators and coordinating with the provincial command center. We had to understand the local situation for the operators and ask for their specific information.”

From previous smaller forest fires, regulators and operators knew that there was actually little external fire danger to mine lands, if any. Given the wide, if ugly, swathes of cleared land around the processing plants, there was little external fire danger to those either.

Still, regulators gave a general, but not blanket, emergency authorization for operators to build berms around their properties without having to file permits in advance. Actions would be reviewed afterward for environmental and safety compliance.

“The oil sands companies had better fire breaks than the towns themselves,” said Cutbush of Aon Benfield.

In addition to homes and two hotels, the wildfire destroyed three camps used by subcontractors to house oil and gas workers, which should be covered under property policies. Other direct damage from fire and smoke should also be among the covered commercial claims, he said.

Remarkably, no deaths were directly attributable to the fires.

Ethan Bayne, chief of staff for the Provincial Wildfire Recovery Task Force, said the area was “lucky the fire spared major elements of the region’s infrastructure. That includes the major hospital, the water treatment facilities and the airport.”

Ethan Bayne, chief of staff, Provincial Wildfire Recovery Task Force

Ethan Bayne, chief of staff, Provincial Wildfire Recovery Task Force

He credited local officials and industries, notably the oil sands producers, with being responsive and responsible. “The province ran an operations command center for the fire response. In the event, private fire apparatus from industry were deployed.”

In all, about 40,000 claims have been filed from wildfire that began May 1 and was finally declared under control on July 5.

It was the costliest insured wildfire on record in North America, and the costliest insured natural catastrophe in all of Canada, according to PCS, resulting in about double the claims filed after the 2013 floods in Southern Alberta.

Standard & Poors reported that primary insurers “generally have sufficient available reinsurance coverage, adequate capital adequacy, and enough group-level support (for certain subsidiaries) to absorb the losses. However, insurers with a smaller premium base and more concentrated or outsize exposure to Alberta could face some strain and their ratings may come under pressure.”

A number of insurance-linked securities funds were also hit by losses from the wildfire, but it’s unclear as to the extent.

Recovery Efforts

While fires continue to burn — there are forest fires all summer, every summer, in Canada and the U.S. — the focus in and around Fort McMurray has shifted firmly to recovery.

In the near term, the commercial focus is on rebuilding and restoration of the temporary housing needs to get business and industry back to capacity.

The IBC coordinated an effort by 40 or so underwriters handling claims to arrange a single contractor to demolish and clear damaged structures in the area.

The Alberta Energy Regulator recovery team is working with operators on start-up operational plans while monitoring regional air quality to ensure there is no risk to public safety or the environment, according to the agency.

Fewer than 1,000 of the nearly 90,000 people evacuated have returned following the lifting of the provincial state of emergency.

“From previous wildfires we have learned, unfortunately, that recovery is not quick and it is not linear,” said Bayne. “There are unforeseen and unforeseeable complications and delays.”

Advertisement




Fort McMurray is accustomed to boom and bust cycles, Bayne said, “but what we are facing now is a scale never before seen.”

“At the peak boom time of the oil sands development, the region saw 600 homes completed in a year. But even if we can repeat that, it would take more than three years to rebuild 1,900 homes. The short-term housing need is already being addressed.”

He added that the first milestone in provincial recovery will be a formal recovery plan due to be released in the middle of September. It will include preliminary assessments of the incident, and also a first look at major needs for recovery.

“I cannot emphasize enough our thanks and appreciation of the oil sands industry, the indigenous communities, and the Red Cross,” said Bayne. “Our role has just been to coordinate the work they have done with the regional municipalities.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

Advertisement




Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

Advertisement




One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

Advertisement




Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]